Quality filter supports apathy and mediocrity

Eric Walters, the company director of wealth management services at Continuum Financial Planners, gives Wealth Professional his take on the widely debated default fund superannuation quality filter.

It is difficult to comprehend that the apathy of 80% of Australian superannuation fund members justifies the continuation of a system that desensitises them to the value of taking advice about their overall wealth management needs.

Given that superannuation is going to be the single biggest asset that these people will have in their lifetimes, the existence or otherwise of a ‘quality filter’ that restricts investment provider options for them, is surely unacceptable. To date, the quality filter, applied by the Fair Work Commission, has limited options available to employers to the secretive union-backed industry superannuation funds (ISFs) and a few retail ‘public offer funds’ (as opposed to opening the market to a more complete range of offerings).

Whilst there is little argument that the superannuation guarantee system that was introduced in the late-1980s (in the provisions of the Superannuation Industry Supervision legislation) has been a windfall for the Australian economy (having been credited with underpinning the survival of the otherwise fragile economy during the GFC), the indignation of the ISFs at the prospect of the removal of the previous government’s quality filter arises from what might be viewed as a significant conflict of interest.

During the Labor government’s recent terms in office, various reports were prepared, notably the Ripoll Report (regarding the provision of Financial Services post the GFC); and the Cooper Review Report (regarding Australia’s Superannuation System). Whilst these two reports were not directly related as to topic, they were often discussed conjointly during 2009 and 2010. The Ripoll Report highlighted some serious anomalies in the quality of advice provided by some financial planners earlier in the decade, pre-GFC; and the Cooper Review Report shone the spotlight on some remuneration issues emanating from superannuation accounts – and paid particular attention to employee superannuation practices.

The Cooper Review gave light to the statistic that around 80% of superannuation account holders have little or no knowledge of their superannuation assets, let alone how many accounts they held, nor how the funds were invested. On this basis, it would also be fair to deduce that they had no concept as to how much insurance protection they held in superannuation accounts, nor which financial advisers might be receiving remuneration for activity on their account in spite of the fact that they had no contact with them in relation to the matter.

In their haste to rectify the anomalies that were brought to light in this review, the government chose to put in place a series of recommendations by legislative and/or regulatory change. In the process, they “abandoned the baby in its bath water” and introduced MySuper (a ‘vanilla’ superannuation product with a prescribed format intended to suit all members, subject to life stage, regardless of their prevailing financial and personal circumstances), and SuperStream (a requisite administrative process that is intended to improve efficiency and transparency, whilst minimising costs).

MySuper is the basic product that employers are required to provide for all new contributions paid from 1 January 2014: a new account regardless of the pre-existence of accounts with the same superannuation provider. The adoption of a MySuper provider’s account by an employer is subject, in particular cases, to the fund having attained acceptance through Australia’s Fair Work Commission’s quality filter.

Under the criteria established by the government of the relevant time, the ‘quality filter’ strongly favours the ISFs – a position they are now anxiously defending. Herein lies the dilemma and the perceived conflict of interest:

80% of superannuation account holders are ‘ignorant’ of their wealth in this asset;

trustees are required to treat all members in each life stage as having the same investment risk aversion profile, having the same personal financial standing, and needing the same level of insurance cover in spite of family structure, dependants or other circumstances.

Fee payments to financial advisers are not available from MySuper accounts.

ISFs are defending their ascendancy in the superannuation space, making much of the “compare the pair” campaign and contesting the removal of the quality filter without having any concern for the issues that would actually improve the financial well-being of members of the funds they control: issues such as:

Education about financial/ wealth management (at a level whereby the member truly understands their financial position);

Personal investor risk profile assessments to ensure that the needs of each member is addressed in the asset allocation within their superannuation account;

Genuine attempts to engage members in the process of amalgamating their multiple superannuation accounts into a preferred fund, selected with understanding; and

Performance of risk management analysis to ensure that appropriate types/ levels of insurance are offered to members.

Because of the apathy of superannuation members under the ISFs individual providers, mediocrity in individual financial performance will statistically always prevail for at least one half of the membership.

In fact, because of the MySuper life stage structure, it is my contention that there is a high probability that an even higher proportion of members will in fact be disadvantaged: a contention that can’t be proven of course – just as the “compare the pair” claims cannot either!

Eric Walters is the company director of Wealth Management Services at Continuum Financial Planners Pty Ltd.

It is important to keep discussion on ISA/ISN imperatives focused on the key points for financial planners or we risk portraying ourselves as nothing more than a vested interest protest group.

The article is right to highlight the national economic benefits that have eventuated from the SGC itself and the so-called "Industry Funds" approach to SGC investment. The mandated contributions have allowed industry funds to increase exposure to illiquid investments, resulting in a higher risk profile and appropriately (albeit slightly) higher returns after accounting for fees. The current process is good for disenfranchised members, good for the economy and good for Australia's long term capital formation and deployment.

However, it also supports rampant cronyism, a single-approach-is-the-only-approach ideology and builds a protected industry in a way equivalent to the productivity destroying trade tariff system that Australia has so painfully dismantled over past decades.

So "industry funds" do have a place in the system, and their scale offers genuine benefits. However, history tells us that such benefits are eventually eroded by the lack of competitive effort and innovation. A large part of this is the award dictated funds for mandated contributions. This is a prehistoric system that has no place in a modern, efficient and dynamic economy. MySuper offerings also remain flawed for many reasons, some of which are raised in this article.

MySuper should deliver close to nil-fee fixed interest accounts, leaving industry funds, retail funds, employer funds and SMSF offerings free to compete to offer the best outcome to those who have yet to make an investment choice.

Two simple moves would dramatically change the superannuation landscape. One - all mandated contributions go to a fixed income MySuper account if no personal nomination is made, and money can only be moved out of those accounts upon the provision of a prescribed minimum content Statement of Advice.

But logic has no real say when vested interests are so strong.

Melinda Houghtonon
8/05/2014 10:31:06 AM

Great article. What I would like to know is how the ISN can say they have better returns based on history, when the MySuper situation is brand new and all funds must operate under the same (bland) rules. You can't "compare" a scenario that has no history to anything.